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Rfz
Topic Author
Posts: 2
Joined: October 11th, 2018, 7:50 pm

Pricing models for MBS

October 11th, 2018, 8:09 pm

Hello everyone!
I have derivatives pricing experience and beginning my new position in a company involved in Mortgage-backed securities pricing.
My question is: what is the best, modern and adviceable pricing technique (model) to price Mbs?

Now I have an opinion (is it correct?) :
There are three main methods to price MBS: econometric, option-based, intensity-based for prepayment.
I think that econometric methods are old with its regression based methods of 1980-s that brings OAS, it doesn't use the difference between P and Q measures.
Option-based approach uses optimal decision principles for pricing which does not exist in reality. And intensity based approach for prepayment modeling is modern, using full power of modern stochastic financial mathematics and does not introduce OAS. So, the last method, developed last years, is more favorable.
Am I right?
 
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gatarek
Posts: 341
Joined: July 14th, 2002, 3:00 am

Re: Pricing models for MBS

October 12th, 2018, 10:23 am

 
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bearish
Posts: 3911
Joined: February 3rd, 2011, 2:19 pm

Re: Pricing models for MBS

October 12th, 2018, 11:12 am

I wouldn’t get too hung up on the choice of probability measure (or, equivalent, numeraire) at the outset. More important questions relate to the level of granularity of your data - do you have a full set of loan level data to work with, and choice of state variables. The primary purpose of your modeling should be to develop and estimate a functional relationship between the path of state variables and prepayment and default behavior, conditional on borrower characteristics. For a reasonably current view of what people are doing in practice, the book by Andy Davidson and Alex Levin is worth a read.
 
Rfz
Topic Author
Posts: 2
Joined: October 11th, 2018, 7:50 pm

Re: Pricing models for MBS

October 12th, 2018, 11:52 am

Davidson uses econometric approach used at 1980s. I also saw new intensity based methods proposed, for example, by Andreas Kolbe.
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